When it comes to making debt payments, most of us probably fall into three categories: those who pay the minimum, those who try to pay a little more than the minimum—and those who are like Jason Vitug.
After Vitug graduated from college in 2003, he found himself saddled with $40,000 in combined student loan and credit card debt. That figure weighed on him so heavily that he took drastic measures to get rid of it quickly: At times that meant making double his minimum debt payments, to the tune of about $2,000 a month—on a $45,000 bank branch manager’s salary.
“My primary goal at that stage was: ‘I just want to pay it off. I don’t want the debt looming,’ ” says 34-year-old Vitug, who recently launched the personal-finance resource site phroogal.com.
He lived with his brother and portioned the bulk of his paycheck toward the debt—enabling him to pay down all of his debt in about four years. But there were two potential problems: Vitug never stashed away any money into an emergency fund for a rainy day, nor did he rein in his lifestyle spending.
So when he decided to go back to business school, he had no savings to help cover tuition, forcing him to take out a new set of loans. The result? An even bigger debt hole of $80,000.
Vitug became caught up in what LearnVest refers to as the “pay, spend, pay” cycle, when well-intentioned debtors excessively overpay their loans or credit cards in order to help unburden themselves of debt faster. But, in doing so, they may deprive other areas of their budget—and may often run up their credit cards yet again because all of their cash is going toward loan payments.
“Pay, spend, pay” is similar to the pattern so many yo-yo dieters engage in: To lose massive amounts of weight quickly, they may suddenly change their eating habits or exercise until they drop. But while that helps them shed pounds at a fast clip, the diet remains unsustainable—and they ultimately pack on those pounds again.
But it is possible to help break the cycle. Our suggestion? Knowing how not to let your debt put you into an emotional tailspin—and creating a plan that helps make debt repayment a stable and consistent part of your budget.